In my previous blog “Beginning Our Beverage Journey: Key Factors that Differentiate the Market”, we reviewed factors that make the non-alcoholic beverage industry unique. Here, we will explore beverage product proliferation and other important questions we should ask concerning key beverage sector characteristics.
The Challenge of Product Proliferation
In the beverage industry, product proliferation refers to a company strategy that promotes introducing and offering a wide variety of SKUs to meet diverse consumer preferences. New SKU introduction may include products with different flavors, additives, formulations, packaging sizes and branding variations. The goal of this strategy is to capture a larger market share, cater to niche markets and compete for customer choice.
A significant consequence of product proliferation is increased competition for production line time. Line capacity is even more of a concern when new SKUs are added to a “swing line” that runs two or more packages that require a substantial amount of changeover time to switch between. As more and more products are added to a package production window, it becomes more and more difficult to ensure that each product is produced in sufficient quantity to maintain safety inventory until the next production opportunity occurs.
Product proliferation also leads to increased competition for warehouse floor space, a situation that is especially difficult for slow-moving SKUs. Turns per pallet position are often longer for new SKUs as they are being introduced and therefore they typically occupy more floor space per case sold than established products. When warehouse capacity is a bottleneck, sourcing a lot of new and slow-moving products only aggravates the problem.
In addition to the above considerations, new juice, dairy-based, and non-carbonated beverage (NCB) SKUs often require special production equipment, ingredients and procedures, and consequently are more costly to produce than carbonated beverages. In order to justify the investment in NCBs, there is continuous pressure to supply an even greater variety of flavors requiring more warehouse space and additional competition for line time and planning resources. Due to the cost of NCB-dedicated lines, there is often a decision to consolidate production into a single location resulting in a large single-source multi echelon supply network. This type of sourcing inevitably results in increased product handling, planning complexity, high across-the-network inventories and higher associated supply-side costs.
Questioning Assumptions across Operations and in Changing Markets
It is natural to try to apply knowledge of one bottling operation to another, however, it is important to consider that operations in different regions of the country (or other countries) can have very different constraints, costs, product portfolios, fleets, markets and cultures. We also know from experience that all of these factors will change over time.
When evaluating a particular operational strategy, it is always important to ask critical questions and challenge assumptions. For example:
- Are the majority of products that your organization sells heavy and bulkyand therefore costly to move relative to their value? For example, does the operation have significant numbers of tetra-pack or pouches, snack foods or some other non-beverage SKUs in its portfolio? If this is the case, alternate (remote) sourcing for these types of products is more of a possibility and the required safety stock could be pooled across multiple potential sourcing points.
- Is transport cost (directly related to the cost of labor and the cost of gasoline) significant in your market? Trucking regulations also impact transport costs by limiting total weight and continuous travel time. These factors vary dramatically around the world and must be taken into consideration when determining whether or not alternate sourcing is feasible.
- Clearly there is a class of products for which consumers are not brand loyal. Do these types of products constitute significant volume in your market? Products that people occasionally buy which do not have large individual volume may need to be planned using a different inventory methodology than is used for core products.
- Is there significant seasonal and event demand variability in your market? How easy is it to separate holiday event demand spikes from seasonality? Seasonal behavior can usually be differentiated from event volume because it closely follows long-term variations in temperature and humidity as well as known seasonal shifts in population.
- Does your market feature intense store-to-store competition, and if so, which products does this competition impact? Competition primarily affects high demand (Class A) products, but may be broad enough to affect items across the portfolio.
- Are there many situations in which your brand is competing side-by-side against another strong competitor? In some cases, a brand may be unique for a period of time or in a market where brand competition is not an important factor. Would “everyday low pricing” be a good option for such a product?
- What is the labor arrangement? How flexible are the production crews, transport drivers and warehouse workers? What kind of lead time is needed to add additional second shifts? Third shift? Weekend shifts? What is the relative cost of labor?
- What is the relationship with raw material suppliers? What is the lead time (mean and standard deviation) for concentrate and primary packaging? How reliable are suppliers?
- Are products being sold in returnable packaging? If so, what are their return rates and cycle times? Do you understand the variability of the return system?
- Is the transport fleet standardized? For each lane (hub to warehouse), is the type and size of transport consistent?
- Are your customers health-conscious and looking to have wellness products that have health benefits such as containing vitamins, minerals, antioxidants or adaptogens? How would introducing products targeting those customers impact your production operations?
Only by gathering information and exploring all of the possibilities can you begin to design the most effective Supply Chain management strategy for your enterprise.
Summary
Upon reviewing the complicated realities of the beverage supply chain, it is evident that it is substantially more difficult to manage than the standard presented in textbooks for typical consumer products. Though it may be relatively easy to produce beverages, the dynamic management challenges that exist in the beverage supply chain make the situation more difficult and complex than it initially appears.
The combination of very large aggregate sales volume, expensive alternate sourcing, Direct Store Delivery (DSD) with short delivery lead times, high demand variability, a highly dynamic market added to the crucial requirement of near perfect customer service creates a supply chain which is almost unique among consumer products.
The importance of using and updating sophisticated planning processes and systems that are highly tailored to the beverage supply chain cannot be overstated. Areté’s Demand Planning and Supply Planning solutions are designed to handle the beverage supply chain in an elegant and effective way to allow end-to-end management from supplier to consumer.
In the next blog of this series, Inventory Fundamentals: Understanding Four Essential Types, we will investigate four types of stock and the business reasons that inventory is held for each of the four classifications. Please subscribe to our blog to be notified as soon as the next entry in this series is available to you!
